The Federal Reserve’s chairman, Jerome Powell, commenting on the current inflation, assured people that it was only a short-term phenomenon. Mohamed El-Erian of Allianz SE disagreed and opined that the Federal Reserve needs to act quickly to control rising inflation.
Inflationary Trends
Speaking to CBS, El-Erian said that terming the burgeoning inflation as transitory was the most inaccurate assessment of inflation ever made by the Federal Reserve. He added that wrong assessments increase the possibility of flawed policies. A failure on the part of the Federal Reserve to quickly correct its assessment of inflation would dent its credibility. It could also possibly push the inflation higher since such projections feed off themselves.
As the US economy continues to recover from the economic shock of the pandemic-induced lockdowns, it is experiencing a price rise across the board. Price rise is seen in energy, food, and consumer items. The Fed, El-Erian believes, is underestimating inflation.
Corrective Action
El-Erian said that the Fed can still control inflation if it honestly accepts its earlier error in assessing inflation. He recommended that the policymakers now need to act to reduce liquidity and cease their support for the housing market. Any delay in acting now would later require radical moves, which would risk driving the economy into a recession.
To kickstart the stalled economy, the Fed has been buying tens of billions of dollars worth of treasuries and mortgage-backed securities every month. The Fed, in November, announced that it would reduce this by $15 billion every month. A recent report on inflation showed that inflation was at a 40-year high. The Fed is expected to cut its spending at a faster rate and also raise interest rates from the current near-zero levels. El-Erian warned that inflation had not peaked as yet. He expected the current inflationary trends could continue for a few more months.
